Sunday, September 2, 2012

There's lots that has been written on it. I just want to make one clarifying point:

NGDP level targeting is a policy goal with an implicit policy rule. It makes sense in a lot of theoretical frameworks, specifically monetarist and Keynesian frameworks. I am still completely confused at how some Austrians seem to think it makes sense in an Austrian framework but I'll take their word for it. It's a goal and an implicit policy rule - we can have a big tent on that.

So how did Woodford come to that policy rule? I haven't read his paper, but from what I gather it came via an argument that was essentially Krugman's Japan argument. A Keynesian argument that is "New Keynesian" insofar as it relies on expectations of future demand (although we all know this is only "New Keynesian" in a formal modeling sense - the Old Keynesians were as well aware of all this as the New Keynesians, their formal models simply hadn't caught up with their thinking).